Question 1
( 5 points) In a world with no frictions (taxes, etc.), value is created by how you finance a project. True.
False.
Question 2
(5) The return of equity is equal to the return on debt of a project/firm Always true.
Never true.
Sometimes true.
Question 3
(10 points) Moogle, Inc. is in the same business as Google, Inc., but has recently retired all its debt to become an all-equity firm. Its return on equity has dropped from 12.25% to 10.60% as a result of this. Google, Inc. continues to have debt in its capital structure, and its debt-to-equity ratio is 30%. What is the return on assets of Google, Inc.(No more than two decimals in the percentage interest rate, but do not enter the % sign.) Answer for Question 3

Question 4
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.00. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 4.5% and the risk-free rate is 3.00%. Suppose the debt-to-equity ratio of your company is 20% and the market believes that the beta of your debt is 0.20. What is return on assets of your business? (No more than two decimals in the percentage interest rate, but do not enter the % sign.) Answer for Question 4

Question 5
(10 points) You are planning on opening a consulting firm. You have projected yearly cash flows of $2 million starting next year (t = 1) with a growth rate of 3% over the foreseeable future thereafter. This endeavor will require a substantial investment and you will have to convince investors to provide you the capital to do so. You will invest some of your own money, convincing other investors will of course be useful for your valuing your own investment decision. A critical piece of your analysis is figuring out the present value of the cash flows of the business. Your research has revealed the following information: similar consulting businesses equity has an average beta of 2.40 and the average debt-to-equity...

...WAAC in preparation for an executive retreat. Too bad, you are not invited, as water pumps and skiing are on the agenda in Sun Valley, Idaho. At least you have an analyst on hand to gather the following required information:
1. The risk-freerate of interest, in this case, the yield of the ten-year government bond, which is 6%.
2. HydroTech’s:
a. Market Capitalization (its market value of equity), $100 million....

...CASE STUDY HOMEWORK CORPORATE FINANCE
PROFESSOR: G. BERTINETTI
STUDENT Albert Maurer
1
The Situation: In 2010 a new company was created in order to enter into the food industry. They spent many months in studying the market, engineering the products and the commercial strategy, find out the production plants. At the end of 2010 the business plan is ready and the company has already participated to an exhibition where many potential customers said to be very...

...How can risk influence risk premium? How are risk and return related?
Risk and return are the fundamental basis upon which investors make their decision whether or not they should invest in a particular investment. How they are related and the influence between the two, is the decision making process that all investors must weigh up. This essay will show how risk can influence risk premium, outlining their...

...isolation may have little, or even no risk if held in a well-diversified portfolio.
b. The feasible, or attainable, set represents all portfolios that can be constructed from a given set of stocks. This set is only efficient for part of its combinations.
c. An efficient portfolio is that portfolio which provides the highest expected return for any degree of risk. Alternatively, the efficient portfolio is that which provides the lowest degree of...

...assets > 30) in any portfolio, you can diversify your exposure to specific/idiosyncratic risk.
False.
True.
Question 2
(10) You have an equally weighted portfolio that consists of equity ownership in three firms. Firm A is trading at $23 per share and has a beta of 1.15; Firm B is trading at $16 per share with a beta of 1.60; Firm C is trading at $76 per share with a beta of 0.85. Assume a riskfreerate of 2% and market return of...

...Nondiversifiable and Diversifiable Risk
c) Because Diversifiable risk can be eliminated through portfolio diversification, the more relevant risk is the Nondiversifiable risk. This kind of risk can be attributed to market forces and factors that affect ALL the firms and cannot be eliminated through portfolio diversification. In this case, the nondiversifiable risk is about 6.00%. Notice that the area...

...and all interestrates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.
Question 1
(10 points) Two firms in the same/identical business will have the same return on equity.
Your Answer
Score
Explanation
False.
clip_image001
10.00
Correct. You recognize that return on...

...with annual tuition and expenses of $25,000 for 4 years. His first college tuition and expenses will due in exactly 16 years from now. Mike decides to put all the money that is required for his son’s college education today at a bank account earning rate of return of 8 percent per year, compounded annually. How much money must Mike set aside today? (10 points)
We can calculate the present value of the tuition payments as a discounted annuity:
Note that we...

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